There are numerous of financing options out there, but you need to do your research and weigh the pros and cons of each. Typically, startups face challenges with securing small business lending, so many will turn to equity investors instead. Venture debt financing is a business loan in which a company will take on debt, rather than accepting money from an investor in exchange for equity.
Venture debt financing is debt a startup takes on in the form of equipment the business requires. Venture debt is usually less expensive than equity financing and differ from traditional small business loans. It is short-to medium-term and involves interest payments. The payments are based on either the prime rate or LIBOR, which is another interest rate benchmark.
It is helpful to understand what venture lenders look for if you are considering venture debt financing. Although everyone will have different criteria, below are some guidelines.
Pros of Venture Debt
Venture loans are helpful when you need to:
Cons of Venture Debt
You should talk with several lenders so you can compare pricing and terms. It is also important to find out if the lender has a good reputation for working with borrowers and that they have experience.
Capital can be obtained through banks or specialty finance firms. Banks have less expensive capital, but their loan size is constrained due to regulatory requirements. Specialty finance firms are more expensive but less constrained.
If you have decided you want to apply for a venture debt loan, the process below will help you during the application process.
Being prepared is key to securing any type of loan because you want to present to the investors your solid business plan. Any information that shows how the loan will impact the company’s growth will be needed in your business plan. The other points you should have prepared are:
By now you should have a better understanding of what venture debt financing is and if it something that is going to benefit your business. If you find that you do not qualify for it just yet, do not be discouraged because there are plenty of other types of financing solutions available for you. If you decide to move forward with venture debt financing, follow the steps in this article to help you achieve approval.